The 2011 Federal Budget (the
"Budget") contains a number of anti-avoidance measures described
below. It does not contain any measures designed to assist with charitable
giving or to lessen the regulatory load on Canadian charities. Rather the changes proposed are consistent
with the promotion of transparency and accountability, as well as the Government’s
long-standing fight against what it views as abusive tax shelters.
What is interesting at this point is that the
Budget may not pass. As of publication
time, all opposition parties have indicated their intention to vote against the
Budget. If this occurs, these budget
proposals will be defeated. It is
customary for the Department of Finance to propose technical changes to the Income Tax Act, that are not passed for
many years, but CRA still treats them as being in effect from date of
announcement (on the basis of a retroactive effective date in the eventual
legislation). While a subsequent
government (of any party) can be expected to bring back some of the charity Budget
proposals, it will be very interesting to see whether changes from a defeated 2011
Budget that are sought to be brought back in a second 2011 Budget are given an
effective date of the first or the second 2011 Budget.
Charities and donors caught by the Budget
changes should seek specific legal advice on whether the changes are likely to
have effect on March 22, 2011 or perhaps at a later date.
In a surprise step, the Federal Government
has proposed to limit the availability of the exemption from tax on capital
gains where the donated shares are shares acquired pursuant to a flow-share
agreement on or after Budget day. The
limitation will be that the exemption from tax on the capital gain will only
apply to the extent that the cumulative capital gains in respect to the gift or
disposition of the shares exceeds the original cost of the flow-through shares.
It is rare for the value of the flow-through
shares gifted to be in excess of the original cost. This may therefore practically shut down the
use of flow-through shares in these gifting arrangements in most provinces. The
following is an example of the tax consequences of the donation of publicly
listed flow-through shares under the current rules:
Price paid for flow-through share
Value of flow-through share
Net value of flow-through share tax
Capital gains tax on disposition of
Value of charitable donation credit
Net after-tax cost
Government tax support as % of donation
The Government has apparently decided that
the extent of tax support the Income Tax
Act permits for such donations is excessive and has therefore decided to
limit the availability of the benefit to the portion of the capital gain
realized that is in excess of the amount paid by the donor for the flow-through
share prior to the deduction of any expenses which can be renounced on the
flow-through shares. This is a
significant change which will mean the benefit of flow-through share gifts will
no longer be available to taxpayers and charities. The Budget proposals also contain
anti-avoidance provisions that are intended to ensure taxpayers are not able to
structure around these changes.
The Budget has proposed significant changes
to the regulatory regime that applies to qualified donees other than registered
charities. The Income Tax Act provides that official donation receipts can be
issued not only by registered charities, but also by other organizations that
meet the definition of “qualified donee.”
registered Canadian amateur
athletic associations (RCAAAs);
municipalities in Canada;
municipal and public bodies
performing a function of government in Canada (largely First Nations bands);
housing corporations in Canada
constituted exclusively to provide low-cost housing for the aged;
prescribed universities outside
Canada, the student body of which ordinarily includes students from Canada; and
charitable organizations that
have received a gift from the federal Crown in the current or preceding year.
Historically, registered charities have
been subject to a stricter regulatory regime than other qualified donees. Under the proposed changes in Budget 2011, RCAAAs
will be made subject to many of the rules that apply to registered charities,
as well as the associated penalties. The
requirement to issue tax receipts in accordance with the Act, as well as to
comply with the record-keeping rules and with CRA’s audit powers, will also be
extended to all qualified donees, which will now face the possibility of having
their qualified donee status revoked if they do not comply.
If the Budget changes are passed, these
measures will apply on or after the later of January 1, 2012 and Royal Asset to
the enacting legislation.
The Budget proposes that all qualified
donees will be required to be on a publicly-available list maintained by
CRA. Currently, such a centralized list
is maintained only for registered charities.
The expansion of the list is designed to better enable members of the
public to determine which organizations may issue official donation receipts,
as well as to allow registered charities to know which organizations are
qualified donees for grant-making purposes.
This is a very helpful change.
With respect to the issuing of official
donation receipts, the Budget proposes that if a qualified donee issues a
donation receipt other than in accordance with the Income Tax Act, CRA may suspend the receipting privileges of that
organization or revoke its qualified donee status. Budget 2011 also proposes to extend the
monetary penalties associated with the improper issuing of receipts to RCAAAs. All qualified donees will therefore need to
ensure that their receipting practices are compliant with the Act and
regulations. Query whether CRA has
constitutional jurisdiction to impose a fine on a municipality.
The Budget proposes to extend the
requirements regarding books and records – which currently apply only to
registered charities and RCAAAs – to all qualified donees. All qualified donees will be required to
maintain proper books and records and to provide access to those books and
records to CRA when requested pursuant to CRA’s audit powers under the Act. If a qualified donee fails to comply, CRA
would be authorized to suspend the receipting privileges of the qualified donee
or revoke its qualified donee status.
The Budget also proposes to extend the monetary penalties associated
with failing to file an information return (which currently apply only to
registered charities) to RCAAAs.
Qualified donees such as municipalities,
prescribed foreign universities and foreign organizations that have received
federal gifts should take careful note of these changes. If the Budget passes, the qualified donee
status of these organizations can be revoked by CRA for failure to comply with
the above requirements. It is noteworthy
in particular that CRA will be empowered to revoke qualified donee status when a
foreign organization does not comply with CRA’s audit powers under the
Act. Such powers have not been
previously recognized under the Income
Tax Act, and organizations that would be subject to them will need to take
steps to ensure compliance. It should be
noted that the federal and provincial Crown, as well as the United Nations and
its agencies, are not proposed to be subject to these new rules.
The Budget proposes several changes that
apply specifically to RCAAAs. The Budget
notes that while registered charities are required to operate exclusively for
charitable purposes, RCAAAs currently need have only the promotion of amateur
athletics in Canada on a nation-wide basis as their primary purpose and primary
function. The Budget proposes that
RCAAAs be required to have the promotion of amateur athletics in Canada on a
nation-wide basis as their exclusive
purpose and exclusive function
(rather than merely their primary purpose and primary function). The Budget
document states that these changes will not prevent RCAAAs from staging or
engaging in international events and competitions, as such activities would
normally be consistent with the promotion of amateur athletics in Canada, given
the participation of Canadian teams and athletes in such events.
RCAAAs will be made
subject to the regulatory rules that apply to registered charities with regard
to related business activities and political activities. RCAAAs will be subject to the same penalties
in respect of these activities as registered charities. RCAAAs will also be subject to the penalties
under the Act as registered charities in relation to the provision of undue
benefits (e.g., excessive compensation to staff, fundraisers, etc).
The Budget proposes
finally to provide public access to the annual information returns, governing
documents, applications for registration and the names of directors of
RCAAAs. This information is currently
available only for registered charities.
The measure is intended to provide greater transparency for the public
regarding how charities spend their funds.
The Budget notes that CRA will consult with
stakeholders regarding these changes and develop an administrative guidance
regarding these measures. In particular,
stakeholders are invited to comment on the proposed “exclusivity of purpose and
function test” for RCAAAs by June 30, 2011.
Stakeholders with concerns about the application of an exclusivity of
purpose and function test are encouraged to comment.
If the Budget passes, these changes will
significantly change the regulatory landscape within which qualified donees
other than registered charities operate.
Such organizations, and RCAAAs in particular, will need to ensure that
their operations comply with the regulatory requirements that currently apply
to registered charities. For many organizations, this will require a thorough
review of current operations, receipting and record-keeping practices.
The Government believes that there is a
pattern of the same individuals being involved in multiple abusive
charities. However, the Budget materials
admit that under the current rules the CRA may be unable to refuse registration
even if there is a high risk of abuse because of the past behaviour of the
charity’s directors and others involved with the charity.
The Budget proposes to give CRA new powers
over a charity’s governance. The
proposals will give CRA discretion to refuse to register an applicant or to
revoke an existing charity or to suspend its receipting ability if any
individual director, officer, or person who otherwise controls or manages the
charity has engaged in any of the following:
been convicted of any crime (in
Canada or elsewhere) involving financial dishonesty or that is otherwise
relevant to the organization;
been convicted in the last five
years of any regulatory offence (in Canada or elsewhere) involving financial
dishonesty (such as securities legislation, consumer protection legislation or
fundraising legislation) or that is otherwise relevant to the organization;
was a director, officer, or
person who otherwise controlled or managed a charity or Canadian amateur
athletic association that engaged in serious non-compliance for which its
registration was revoked within the past five years; or
was a promoter of a charitable
donation tax shelter involving a charity that was revoked in the past five
years for participation in the shelter.
The Budget papers confirm that the
revocation/refusal is discretionary and that CRA will consider the
circumstances. Although the Budget
suggests that background checks will not be necessary, we suggest that cautious
charities begin to obtain them for board members and management. The Budget also confirms that the above
provisions are not to take effect until the later of January 1, 2012 and Royal
Assent and suggests that CRA will consult with the charitable sector in
developing its policy on these governance proposals.
Occasionally a charity or a donor will want to
return a gift. For example, a charity may wish to return a
gift to a donor whose association with the charity may harm the charity’s
reputation or where the gift turns out to be proceeds of a crime. Donors may also seek the return of a gift
where the gift was not used as the donor originally intended. Typically, gifts are irrevocable transfers of
property and therefore, at law, it is rare that a charity can legally return a
gift. Where gifts are
returned improperly in Ontario, the Public Guardian and Trustee may seek the
return of the returned gift. Charities
should seek legal advice to determine if it is legally possible to return the
gift before taking action.
Before the 2011 Budget, the Income Tax Act and CRA policy were
relatively silent on the tax consequences that arose when a charity returned a
gift to a donor. The Budget now
addresses this issue directly with the following rules:
If a qualified donee issues a charitable
tax receipt to a donor and then subsequently returns the gift to the donor, the
donor is deemed not to have made the gift at the time the gift was originally
made. The donor is also deemed not to
have disposed of the property at the time the gift was made. Essentially the gift is undone retroactively
for tax purposes.
If the returned property is identical to
the original property, it is deemed to be the same property. Thus, if a $100 gift is returned, it will be
considered the same $100 and the tax consequence is limited to disallowing the
donation credit or deduction. However, if
the returned property is not the same or identical property, then the person is
deemed to have disposed of the original property at the time the person
acquires the returned property. For
example, if the donor donated securities and receives cash in lieu of the securities
(presumably because the charity sold the securities), then the donor is deemed
to have disposed of the securities on the day the cash is received by the
donor. Thus, the donor will have tax consequences with respect to the
disposition of the securities at the time the gift is returned.
Where the returned amount exceeds $50, the
new rules require the charity to issue a revised official donation receipt and
file a copy of the receipt with CRA.
The government now has the authority to
reassess a return of income in respect of a return of property from a qualified
donee. Thus, even if a taxpayer’s return
for a particular taxation year is statute-barred -- that is, CRA cannot otherwise
reassess the taxpayer for the year in question -- the proposed change will
allow CRA to reassess the taxpayer in respect of the returned gift and
disallow the deduction or credit in the earlier year. Further, if as indicated
above, the rules cause a deemed disposition because the returned property is
not identical to the gifted property, the taxpayer may have a tax liability in
the year the gift is returned.
The changes do have a certain logic as they
will prevent donors from obtaining windfalls.
However, they do have the possibility of imposing hardship on donors in
The Budget has introduced provisions
designed to delay the recognition of a gift where an option to acquire a
property is donated to a qualified donee.
Prior to the introduction of these provisions, where a donor granted an
option to acquire a property to a qualified donee, a receipt could be issued
and the gift was recognized immediately for the value of the option.
Parallel provisions are proposed for gifts
by individuals and corporations.
Generally, where a donor issues an option to a qualified donee, the
recognition of the resulting gift is delayed until the option is exercised by
the qualified donee.
Where an option is given to a qualified
donee and is exercised by the qualified donee to enable the qualified donee to
acquire property, it will be deemed to be a gift at the time of exercise where
one of two conditions is met:
80% of the fair market value of
the property exceeds the total of (a) any consideration received by
the donor from the qualified donee to acquire the property, plus (b) any consideration received by
the donor from the qualified donee to acquire the option; or
the donor establishes to the
satisfaction of the Minister that the granting of the option and the
disposition of the property subject to the option was made by the donor with
the intention of making a gift.
Based on the above, a gift will not
be recognized where the total of the amount paid by the qualified donee for the
property and the option exceeds 80 per cent of the fair market value of the
property at the time of acquisition by the qualified donee. These rules are designed to be in keeping
with the (still proposed) split-receipting "80/20 rule" that provides
that where an advantage associated with a gift exceeds 80 per cent of the value
of the property transferred, there is no gift.
When either of these two conditions is met
and the exercise of the option triggers the recognition of a gift, the donor is
deemed to have disposed of property (i.e.,
the option) for proceeds equal to the underlying property’s fair market value
at the time of exercise. As well, the
donor is deemed to have made a gift to the qualified donee equal to the amount
by which the fair market value of the underlying property exceeds the amount of
any consideration received (as described in 1 above). We note that there appears to be a technical
error in the drafting of this particular portion of the proposed legislation
but we believe that this is what was intended by these new rules.
Where an option to acquire property is
gifted to a qualified donee and subsequently disposed of by the qualified donee
(i.e., it is sold prior to being
exercised), the donor is deemed to have disposed of property:
at an amount equal to the cost
of any consideration paid by the qualified donee to acquire the option in
property in the first place; and
for proceeds of disposition
equal to the fair market value of any consideration (other than a
non-qualifying security) received by the qualified donee for disposing of the
option in property (i.e., the sale price, if any).
In these circumstances, the donor is also
deemed to have made a gift for receipting purposes equal to the proceeds of
disposition in 2 above (i.e., the sale price if the option is sold) less any
consideration paid by the qualified donee to acquire the option in the first
In light of these complicated new rules,
charities and other qualified donees that are approached by a donor with a
potential gift of options should seek specific advice before accepting such
The non-qualifying security rules are
designed to prevent a person from receiving a donation tax receipt where the
person’s gift to a qualifying donee is a share, debt obligation or other
security of the person or of a person not at arm’s-length from the person. This type of gift is known as a
non-qualifying security (“NQS”). In general, the rules provide that the person
can receive a donation tax receipt for a gift of a NQS when within 5 years
either: (i) the qualifying donee sells the NQS (for consideration other than
another NQS of the individual) or (ii) the gift is no longer a NQS.
For example, if a person issues a personal
debt to a charity for $1000, they do not receive a charitable tax receipt for
$1000 at that time. If within the 5 year
period, the person pays the charity $1000 for the gifted debt obligation, they
receive a charitable tax receipt of $1000 at that time.
Tax Act currently provides that a donor receives a receipt when the qualifying
donee sells the NQS for consideration other than another NQS of the donor. The Budget proposes to broaden this to deny
receipts where the qualifying donee sells the NQS in exchange for a NQS of any
Further, the Budget proposes new rules to
catch situations in which a donor avoids the application of these rules by
implementing a series of transactions, where at the end of the series of
transactions the qualifying donee holds a NQS of the donor. The Budget proposes two rules. The first rule catches a specific series of
transactions. The second rule is a more general
rule to catch any series of transactions where a person makes a gift to a
qualifying donee, the qualifying donee receives a NQS, and it is
reasonable to consider that a purpose or result of the qualifying donee’s acquisition
of the NQS was to facilitate the person’s gift.
There have been a number of charity tax proposals
put forward in the last year by the charitable sector as suggestions for
change. One change that we thought had a
real chance of success (because it had no real tax revenue cost, unlike various
proposals for expanded donation recognition) was the proposal to move
charitable registration and revocation appeal jurisdiction from the Federal
Court of Appeal to the Tax Court of Canada.
This change was the only one suggested by the Joint Regulatory Table of the
Voluntary Sector Initiative that was not passed into law as part of the 2004
Budget. It has been requested by charity
sector organizations and others on a number of occasions since.
Charity registration appeals go directly
from CRA to the Federal Court of Appeal by way of judicial review. This is less than ideal because the procedure
of the Federal Court of Appeal (the second highest court level in Canada) is
not designed for ease of access. We had
therefore hoped and the sector had requested that charity appeals would go
first to the Tax Court, and only proceed to the Federal Court of Appeal after
first being heard at the Tax Court.
Unfortunately, original jurisdiction over
charity registration appeals was not moved in the Budget and remains with the
Federal Court of Appeal. We can only
hope that this change will be included in a subsequent budget.
This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.
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